Who needs a $1 million life insurance policy?



Myles Ma

Myles Ma

Senior Reporter

Myles Ma is a senior reporter at Policygenius, where covers personal finance and insurance and writes the Easy Money newsletter. His expertise has been featured in The Washington Post, PBS, CNBC, CBS News, USA Today, HuffPost, Salon, Inc. Magazine, MarketWatch, and elsewhere.

Published December 5, 2017 | 3 min read

Policygenius content follows strict guidelines for editorial accuracy and integrity. Learn about our editorial standards and how we make money.

News article image

For most of us, $1 million probably seems like it's out of reach. But even if your bank account has a mere six or even five figures, you may still need a $1 million life insurance policy.

While what you can afford plays a big role in the size of your life insurance policy, the amount of life insurance you buy should also depend on the needs of the people you leave behind.

How much life insurance do you need? The formula is pretty simple: Your policy should cover whatever financial obligations you leave behind when you die. In general, the bigger your obligations, the more life insurance you'll need. Figuring out your obligations will take some math, though.

What are your financial obligations?

Your financial obligations add up to the amount your policy will have to cover in the event you're not around to pay them yourself. If this number reaches or exceeds $1 million, you'll probably need that $1 million policy. Your obligations generally break down into two categories: Your dependents and your debt.

Your dependents (hopefully) love and cherish you, but they also depend (hence the name) on you and your money. One of the biggest expenses your policy will have to cover if you die is your children, especially if you plan to pay for part or all of their college education.

College is increasingly the costliest thing in many people's lives. The national average annual tuition at a four-year public college was nearly $8,000 in 2015-16, according to the U.S. Department of Education. If your kid wants to go somewhere like Columbia University, the annual cost shoots up to more than $50,000, and tuitions keep rising each year. If you have multiple kids you want to put through school, you can see how the size of your financial obligation could quickly balloon.

The other big financial obligation is debt. The most significant and longest-lasting debt most people have is a mortgage. If you don't want to saddle your loved ones with that debt when you die, your policy should cover your mortgage.

You may also have your own student loan debt to pay off (see what we said before about college being expensive). That's another big obligation you probably want your life insurance to cover.

Taking these three obligations into account: Your kids' future college tuition, your mortgage and your own student debt, and you can probably see how your financial obligation, and the size of your life insurance policy, can approach $1 million, even without taking into account any end-of-life expenses, other debt you might owe for a car or credit card, or extra financial cushion you might want to provide for your dependents.

What is your safety net?

There is another side to the coin, however. Even if your financial obligations add up to $1 million, your safety net can help reduce the amount of life insurance you need, and the premiums you'll have to pay. Your safety net comprises your savings, financial assets and any other life insurance you may have.

This can include anything stocked away in a savings account, your investments, your retirement account or anything you've already put away for your kids' college tuition.

Not everyone takes their safety net into account when calculating how much life insurance they need. Some people want to keep it as a separate nest egg. But it may be a factor in deciding whether you need a $1 million life insurance policy.

Adding it all up

So do you need a $1 million life insurance policy? The best way to decide is probably by weighing your financial obligations against your existing safety net. The difference is how much your life insurance policy should cover.

You can probably do this on your own with pencil and paper or a spreadsheet, but if you want extra help, you can also calculate your life insurance needs on Policygenius.

Image: Yagi-Studio